Canada economy has biggest quarterly drop in seven years, third-quarter rebound seen

August 31, 2016 1:57 PM EDT

The moon rises behind the CN Tower, a Canadian landmark, and the skyline in Toronto, Canada November 24, 2015. REUTERS/Mark Blinch

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By Leah Schnurr

OTTAWA (Reuters) - Canada's economy shrank in the second quarter, its worst showing in seven years, hurt by a drop in exports and a disruption to oil production caused by wildfires in Alberta, though growth was seen as likely to rebound later this year.

While the quarterly drop slightly exceeded market forecasts, economists were encouraged by other figures released on Wednesday that showed the economy resumed growing in June.

They said the June pickup supports the Bank of Canada's view that growth will recover in the third quarter. The central bank is not expected to move off the sidelines at its meeting next week. [CA/POLL]

"I think the Bank of Canada is still confident that exports will turn up and lead the economic expansion in the second half of the year," said Sal Guatieri, senior economist at BMO Capital Markets.

Gross domestic product contracted at an annualized 1.6 percent rate in the second quarter, Statistics Canada said.

That exceeded forecasts for a contraction of 1.5 percent and was the biggest annualized decline since the second quarter of 2009, when Canada was in a global credit crisis-induced recession.

"The quarterly GDP print for the second quarter wasn't pretty, but no one was expecting it to be," wrote Andrew Grantham, senior economist at CIBC.

The Canadian dollar cut declines against the greenback following the report, but it had weakened further by midday as oil prices fell. [CAD/] [O/R]

A drop in exports of goods and services was the main hit to growth in the second quarter. The decrease was widespread across most types of goods, including motor vehicles and consumer products.

Exports of energy products, including crude oil and crude bitumen, declined due to May wildfires in northern Alberta.

An acceleration in exports is important to the central bank's outlook, and Friday's trade report will be scrutinized for how they fared at the start of the third quarter.

Business investment remained weak, but the rate of decline was not as steep as it has been, an encouraging sign for the central bank.

"There are good signals in there," said Desjardins senior economist Jimmy Jean. "It bodes well for the third quarter."

Other figures indicated a pickup in the economy was already under way. Gross domestic product grew 0.6 percent in June, helped by a rise in non-conventional oil extraction as capacity returned following the fires.

(Additional reporting by John Tilak and Allison Martell in Toronto; Editing by Lisa Von Ahn and David Gregorio)

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